Russia Offers Exxon New Projects as U.S. Sanctions Loom
Russia is currently discussing new projects in the oil and gas sector with United States (U.S.) energy giant ExxonMobil, despite U.S. policymakers contemplating new sanctions that would affect Russia’s banking and energy industries.
On Tuesday October 23, it was announced that Russia’s state-owned Rosneft and Exxon plan to build a liquefied natural gas (LNG) plant. The two companies, along with Japan’s Sakhalin Oil and Gas Development Company SODECO and India’s Oil and Natural Gas Corporation Videsh, will form a consortium to construct the plant—estimated at 15 billion USD.
Several proposals have been offered to Exxon by Rosneft, including cooperation on natural gas, refining, and chemicals. These three sectors, including LNG production, are currently outside the scope of U.S. sanctions. Two undisclosed sources said that both Rosneft and Exxon are committed to moving forward with the LNG plant project under the framework of the Sakahlin-1 agreement, a major hydrocarbon project involving the same participants as the proposed LNG plant project.
Lawmakers in Washington are considering extending sanctions on Moscow that would encompass energy projects, Russian uranium imports, and sovereign debt transactions. Introduced in early August, the bill is meant to crack down on Russia for allegedly violating the sanctions that were implemented in 2017.
Earlier this year, Exxon announced it would pull out of most of its joint ventures with Rosneft that involve oil and gas exploration in the Arctic and Black Sea. This decision came after the U.S. imposed additional sanctions on Russia for its alleged interference with the 2016 presidential elections.
After Exxon left most of the joint ventures with Rosneft, the only significant project that remains is the Sakhalin-1 project. There were several disputes over this project that contributed to strained Exxon-Rosneft relations. Some of the issues were resolved in September, but according to Moscow officials, the Russian offers for new projects are not related to the settlements.
Exxon’s oil production has been steadily declining over the past six years. As part of an effort to reverse this trend, Exxon has turned to Brazil, Guyana, and Russia. Additionally, the company announced that it aimed to increase production in the Permian Basin to 600,000 barrels per day by 2025.
It is unlikely that Congress will impose sanctions on Russia’s energy sector before the November midterm elections. There is no vote scheduled in the House, before November 6, for sanctions against Russia. Even if the Senate passed the bill before the election, the House would have to approve before the bill could be signed by President Trump. Despite gaining considerable bipartisan support, the movement seems to have lost momentum, according to Alexey Pogorelov, an analyst at Credit Suisse Group AG in London. Pogorelov said that Congress’ agenda may not be the same after the midterm elections.
Exxon’s readiness to participate in energy projects with Rosneft is a high-risk move in an uncertain environment. Unable to predict which sanctions may be imposed, foreign investors have sold approximately 7.5 billion USD of Russian sovereign debt since April 2018. Many oil and gas companies have backed away from Russia since the 2014 and 2017 sanctions were imposed.
The impact of new sanctions targeting the energy sector could be profound on European and U.S. companies. Western companies will be pushed out as they are unable to invest and form joint ventures; consequently, companies from China and elsewhere may serve as replacements. Geopolitical instability in the region could place upward pressure on oil and gasoline prices, ultimately benefiting Russian oil firms at the expense of American consumers. However, until a detailed plan is implemented, it is still unclear exactly how the sanctions would impact markets and the global economy.
Sources: Reuters, Oil Price, Chron, Bloomberg